October 15, 2019

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SEC Proposes Amendments to Modernize Items 101, 103, and 105 of Regulation S-K

For the third time in less than a year, the U.S. Securities and Exchange Commission (SEC) seeks to modernize and simplify certain Regulation S-K disclosure requirements. After adopting final rules in August 20181 and March 2019,2 the SEC has now proposed additional amendments to Items 101 (Description of Business), 103 (Legal Proceedings), and 105 (Risk Factors) of Regulation S-K to better reflect market developments over the past 30 years.3 While the proposed amendments to Items 101 and 105 emphasize a principles-based approach to disclosure, the proposed amendment to Item 103 takes a more prescriptive approach. Highlights of these proposed amendments are summarized below.

Item 101 – Description of Business

The SEC proposed amendments to Item 101(a) (which currently requires disclosure of the general development of the registrant’s business during the past five years, or such shorter period as the registrant may have been engaged in business) and Item 101(c) (which currently requires a narrative description of the business) of Regulation S-K.

Item 101(a)

The proposed amendments to Item 101(a) would eliminate the five-year disclosure timeframe, and simply require registrants to present information material to an understanding of the development of their business. In addition, for filings subsequent to a registrant’s initial registration statement, the SEC proposed to revise Item 101(a)(1) to require only disclosure of material business developments, if any, during the reporting period. The registrant would be required to incorporate by reference, and include an active hyperlink to, the most recently filed disclosure that, together with the update, would present the complete business development disclosure. The proposed amendments would also revise Item 101(a)(1) to include a non-exclusive list of the types of information registrants may need to disclose if material to an understanding of the general development of their business. Transactions and events that affect or may affect the registrant’s operations, including material changes to a registrant’s previously disclosed business strategy, would be a new addition to this list.

Item 101(c)

Item 101(c) currently includes a list of ten items required to be discussed to the extent material to the registrant’s business and another two items that must be discussed with respect to the registrant’s business. The proposed amendments would revise this list to eliminate explicit reference to certain items, such as disclosure about new segments and dollar amount of backlog orders believed to be firm, although the SEC noted registrants would still need to provide these and other disclosures if they are material to an understanding of their business. The proposed amendments would consolidate certain other requirements, such as “revenue-generating activities, products and/or services, and any dependence on revenue-generating activities, key products, services, product families or customers, including governmental customers” and “status of development efforts for new or enhanced products, trends in market demand and competitive conditions.” They would also require disclosure of the material effects of compliance with government regulation (including environmental regulation) and human capital resources. The requirement to describe human capital resources would replace the requirement to disclose the number of employees and would require a description of any human capital measures or objectives that management focuses on in managing the business (e.g., depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel).

Item 103 – Legal Proceedings

The SEC proposed to revise Item 103 of Regulation S-K to expressly permit registrants to hyperlink or cross-reference to the required legal proceedings disclosure in another section of the filing. The proposed rules would also increase the sanctions threshold for disclosure of environmental proceedings from $100,000 to $300,000.

Item 105 – Risk Factors

Item 105 of Regulation S-K currently requires disclosure of the “most significant” factors that make an investment in the registrant or offering speculative or risky. The proposed rules would replace “most significant” with “material” and require summary risk factor disclosure in the forepart of the applicable filing if the risk factor section is longer than 15 pages. The summary would include a series of short, concise, bulleted or numbered statements summarizing the principal factors that make an investment in the registrant or offering speculative or risky. The proposed rules would also require registrants to organize their risk factor disclosure under relevant headings, with any generic risks disclosed at the end of the risk factor section under the heading, “Generic Risk Factors.”

Next Steps

Comments on the proposed rules are due 60 days after publication in the Federal Register. Companies should review the proposed rules, including the specific requests for comment in the proposing release, consider how the amendments, if adopted, would impact their disclosure, and determine whether to timely submit any comments to the SEC.

1 See “Disclosure Update and Simplification,” SEC Release No. 33-10532 (Aug. 17, 2018) [83 FR 50148 (Oct. 4,2018)], available at https://www.sec.gov/rules/final/2018/33-10532.pdf. See also our prior client alert, “SEC Adopts Final Rules to Update and Simplify Disclosure Requirements,” available at https://www.natlawreview.com/article/sec-adopts-final-rules-to-update-and-simplify-disclosure-requirements (Aug. 22, 2018).

2 See “FAST Act Modernization and Simplification of Regulation S-K,” SEC Release No. 33-10618 (Mar. 20, 2019) [84 FR 12674 (Apr. 2, 2019)], available at https://www.sec.gov/rules/final/2019/33-10618.pdf. See also our prior client alert, “SEC Adopts Final Rules to Further Simplify Disclosure Requirements,” available at https://www.natlawreview.com/article/sec-adopts-final-rules-to-further-simplify-disclosure-requirements (Mar. 26, 2019).

3 See “Modernization of Regulation S-K Items 101, 103, and 105,” SEC Release No. 33-10668 (Aug. 8, 2019), available at https://www.sec.gov/rules/proposed/2019/33-10668.pdf.

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About this Author

Jessica L. Dickerson, Womble Bond Dickinson, finance lawyer

Jessica Dickerson primarily focuses her practice on public company representation, including capital markets transactions, securities regulatory and compliance advice, corporate governance advice, mergers and acquisitions, and other general corporate and securities matters.

Having worked both in private practice and at the U.S. Securities and Exchange Commission (SEC), Jessica’s experience encompasses a wide array of transactional and securities compliance matters. Her work includes advising companies on public and private securities offerings, tender offers, and...